The Questor Column

Hold on as Shire ploughs steadily ahead

Shire Pharmaceuticals hasn't had the easiest of times of late. In common with much of the sector, the niche drugs company has seen its share plummet from £11.12 to a low of 454.5p.

The company's investment case has been overshadowed by the high costs involved in marketing Adderall XR, its new version of hyperactivity drug Adderall. Pre-launch marketing for new drug Fosrenol has also affected earnings.

Analysts predict that the company's earnings will now be flat this year, but that's not a reason not to consider Shire. The company's strategy - of focusing on a few drugs and eschewing the traditional pharmaceutical sector pastime of haemorrhaging money on research and development - is still sound.

Shire has been criticised for its dependence on Adderall, the attention deficit disorder drug that has since come off-patent.

XR, as the name suggests, is the new slow release formulation of Adderall, and it is proving popular. Because the drug is designed for children, XR is a boon as it doesn't need to be taken during the school day.

Second-quarter figures earlier this month showed that Shire had increased sales of the Adderall brand by 50pc, despite the fall in sales of the original version.

After second-year figures, many analysts upgraded their forecasts, and Shire shares have started to rise too. Yesterday, they bucked that trend, falling 3 to 615p, but the rise does look set to continue.

The shares are now on 18 times forward earnings, which is a significant discount to US peers, although ahead of troubled Astrazeneca and Glaxo. Because the company has relatively high growth and good products, it is worth the price.

Although the market for Adderall is still competitive, new drug Fozrenol, for kidney dialysis patients, should help the company move forward.

Questor last looked at Shire in March, when the shares were 520p, and advised investors to hold on despite tough times. The shares still look like a solid investment.

Weir plans to pump up margins

Weir Group is hardly a glamorous company. The engineering group makes valves and pumps, and we're not talking about a trendy pair of size nines.

Yesterday its interim results failed to excite, coming in broadly in line with expectations.

Pre-tax profit before exceptionals and goodwill looked like they needed inflating, remaining largely flat at £25.6m.

The share price dropped in morning trading as investors took fright at cautious statements by the engineering group about the state of the market. However they closed up 1.5 at 247.5p. It seems that in these times, flat profits are not all that bad.

Clearly, if the competitive engineering market continues to prove tough, it will make life difficult for Weir. Equally, the fact that 40pc of its sales come from the US could have detrimental effects if sterling continues to strengthen against the dollar.

House broker UBS Warburg downgraded its full year pre-tax profit forecast by £400,000 to £61.1m due to the weaker dollar, although it said the cut was less than expected due to first half performance.

However, Weir has shown it is capable of self-help. Cash increased by £18.4m against a £6.7m outflow last time.

During downturns manufacturing businesses tend to experience deflating cash reserves against inflating working capital. Weir seems to have streamlined its processes effectively enough to reverse that trend, which should also help the management towards its goal of doubling margins.

The shares have fluctuated between a low of 160.5p and a high of 318p over the past five years and currently trade on an undemanding earnings multiple of around 11 times.

The benefits from the company's restructuring should be seen next year and the downside will be limited by the 5pc yield. Buy.

Cookson rights are the lesser evil

Cookson shareholders have until 9.30am next Wednesday to subscribe for the debt-laden ceramics-to-circuit-boards group's £290m rights issue. On balance, Questor thinks they should.

The risks associated with bailing the company out appear to be less than the risks of not taking part. The latter include serious dilution, because shareholders are being offered eight new shares at 25p for every five they own.

Moreover, if enough shareholders don't take up their rights they will effectively force the company into a value-destroying fire sale of assets that will be in no one's interest but the buyers.

Of course, the main worry about subscribing is that it could be throwing good money after bad, given that Cookson's management has already made some serious mistakes.

However, if the debt issues are resolved, the underlying business should look undervalued. Two of the operations - ceramics and precious metals - are making decent returns on combined sales of about £1 billion. Electronics is struggling but the share price currently implies it has no value, which is unfair.

Yesterday, the stock firmed up .75 to 27.25p after Cookson said institutional shareholders speaking for 45pc of the equity had given written indications of support. That's an encouraging figure, given that many more will be bound by policy not to give such assurances.

Cookson's dividend has gone but the shares are trading on just 10 times earnings for 2004. It may be galling, but it's probably better to take up your rights rather than cut off your nose to spite your face.